Time to Say Goodbye to Company Health Plans?

More and more businesses are opting out of traditional health care plans in favor of private exchanges.

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Even employees who get health insurance through their companies may soon be purchasing plans via exchanges.

A growing number of businesses are opting out of providing traditional insurance in favor of private exchanges, which allow consumers to search for health insurance in much the same way they'd search for a vacation package on Travelocity.com. The companies are providing workers with a set dollar amount they can spend on the exchanges, and workers who want a more robust plan can make up the difference out of pocket.

Experts say the trend reflects a desire for companies to cap their exposure to health care costs which have been increasing at two or three times the rate of inflation. Employers have added incentives to reduce health costs, since companies with extremely high-value "Cadillac plans" will have to pay additional taxes under Obamacare.

The private exchanges are not affiliated with the state-run Obamacare exchanges that will launch October 1. Under the health care law, large companies must provide insurance to their employees, and full-time employees who can get health insurance at work are not eligible for subsidies for the public exchanges.

The exchanges also meet a growing demand by employees for more control over their healthcare options. "These exchanges meet both the affordability needs of the employer and the retail experience demands of the employee," says Rich Birhanzel, managing director of Accenture Health (NYSE:ACN).

A Growing Movement

The move toward private exchanges is still relatively small, but it's expected to explode in the next five years. Next year, about 1 million consumers will buy their employer-sponsored insurance via a private exchange, versus 9 million who will use the public exchanges. But by 2018, 40 million employees will be buying insurance via private exchange, surpassing the projected 31 million public exchange users, according to a recent report by Accenture. About a third of large employers are considering a shift to private exchanges, according to a survey released last month by The Kaiser Family Foundation.

"Employees have been shifting toward cost-sharing for a long time with co-insurance and higher deductibles," says Devon Herrick, a senior fellow with the National Center for Policy Analysis. "But now they're giving workers the option put in more dollars for a plan that works better for them."

This year, annual health insurance costs for a family averaged $16,400, with employers paying about three-quarters of that, according to the Kaiser Family Foundation.

The shift toward the exchanges signals a continued move by employers to create defined contribution healthcare plans, rather than defined benefit plans, mirroring the shift to defined contribution retirement plans (401ks), rather than defined benefit plans (pensions). Just as consumers now have to make educated decisions about their retirement investments, they're also going to have to make informed choices about the best health insurance solution for themselves and their family.

High-profile companies like IBM (NYSE:IBM) and Time Warner (NYSE:TWC) have already shifted their retirees onto such exchanges, and experts say the next wave will be for companies to move active employees onto exchanges. Benefits consultancy Aon Hewitt launched its private exchange last year, and has already attracted 18 large employers, including Sears (NASDAQ:SHLD) and Walgreens (NYSE:WAG), and it expects to cover more than 600,000 employees this year.

The private exchanges are either run by a single insurer, or through a benefits consultant that brings in plans from multiple insurance providers. Experts say the latter version should lead to lower costs, since providers may lower their rates in order to lure consumers onto their particular plan over a competitor.

Public Vs. Private

Experts say that the launch of the Obamacare public exchanges next month will increase awareness of private exchanges among both workers and employers. "Health care really was the last thing that you couldn't really buy online," says Alan Cohen, chief strategy officer of private exchange company Liazon. "But now you're going to have 10 million people doing it and talking about it."

Unlike the public exchanges, consumers on the private exchanges will see group rates that reflect agreements between their employer and the insurer, based on the overall risk of that company's workers. When a worker logs onto the exchange, he'll answer a few questions about his medical profile, preferred doctors, appetite for risk, and get several options at different price points that meet his needs. "These exchanges are much less of a one-size-fits-all solution," says Mike Thompson, New York Metro healthcare practice leader of PricewaterhouseCoopers Human Resource Services.

When given the choice, workers on the new exchanges typically opt for the higher-value plans with lower premiums but higher deductibles and a more limited network, which eventually saves the company money.

But some worry that if the defined contributions don't keep pace with the increased costs of healthcare, the employees could be stuck making up the difference. How employers and employees handle that shift will determine whether private exchanges really take off.

"We think that private exchanges will eclipse public exchanges early on, depending on whether or not they are really affordable and sustainable," Aetna (NYSE:AET) CEO and Chief Enterprise Risk Officer Shawn Guertin said in a second-quarter conference call with investors. "We could see a wholesale shift to private exchanges in 2016 and thereafter.. but it depends on whether or not... employers [can] comfortably move the burden to their employees and that those employees won't be back knocking on the door, not only about wages, but also the cost of their health benefits."